Abstract

This paper examines how globalization and institutional quality affect international capital inflows. Using the KOF globalization index and its single dimensions (economic, social and political), we show that globalization and institutional quality not only individually have a significant positive impact on international capital flows, their interaction effects are also significant. In particular, the partial effect of globalization on capital inflows is decreasing with higher levels of institutional quality. As globalization expands and institutional quality improves, the return in capital flows increases at a decreasing rate. By decomposing globalization into its single dimensions, we find that social and economic globalization drive these results. Among components of social globalization, cultural proximity plays an important role in attracting capital inflows.

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